Distributors fight counterfeit components

By Rob Spiegel, Contributing Editor
- April 6, 2010

The problem of counterfeit components is
getting worse, even as OEMs, suppliers, and distributors improve their
identification tactics. The Department of Commerce released a report
earlier this year that showed incidents of counterfeiting rose 240
percent from 2005 to 2008. The department’s Office of Technology
Evaluation studied 387 companies from five segments of the electronic
supply chain from 2005 though 2008. OTE revealed that 39 percent of
companies in the survey encountered counterfeit electronics during the
four-year period.

The companies on the forefront of the
counterfeit battle—independent distributors—uniformly report that
problem is getting worse. “I believe the threat posed by counterfeit
parts should be elevated from orange to red,” says Steve Calabria,
president of PC Components Company,
an independent distributor in Seaside Park, NJ. “OEMs are combing the
market for raw materials. We’ve been selling parts in the open market
since 1964, and we’re seeing record sales.”

The record sales in the open market are a result
of the downturn. The global recession and nascent recovery have
magnified the incidence of counterfeiting. Suppliers sliced inventory
levels during the recession. When demand picked up, lead times stretched
out. In response, OEMs and EMS providers went out to the open market to
find components to feed production. What they found was a lot more
counterfeit parts than before the downturn. “Low inventory levels in
component manufacturer factories and franchised distributors have
increased the need to use the open market,” says Calabria. “Allocations
and shortages provide an opportunity for criminals.”

To compound the problem, counterfeiters are
getting better at disguising fake parts. As one distributor commented,
“They can spell Texas Instruments now.” Counterfeiters are cleverly
finding new disguises as distributors get better at detection.
“Counterfeiters are getting more sophisticated, so it’s getting
difficult to spot counterfeit products,” says Robin Gray, executive vice
president of the National Electronic Distributors Association
(NEDA) in Alpharetta, GA. “Visual inspection might not be enough to
detect counterfeits. Even if you random-test, they salt real product in
with the bad product.”

The big independent distributors have become
vigilant about identifying counterfeit parts. Their very existence
depends are their ability to keep their inventory clean and honest.
“Some counterfeiters are sanding the part, then recycling the resulting
dust and combining it with resin. They reapply it to the top of the
part, which makes it difficult to identify as counterfeit. It’s
resistant to some of the solvents we use for identification,” says Debra
Eggeman, executive director of the Independent Distributors of Electronics Association (IDEA) in Buena Park, CA. “So we’ve had to find other ways to identify these parts.”

The reports from the field show that most
counterfeit parts continue to originate in Asia, particularly China.
There are a number of sources. Some component factories run midnight
“ghost” shifts where they run parts off contract while substituting
cheaper materials. Other parts are pulled off e-waste products showing
up in China from all over the world. “More than 90 percent of the
world’s counterfeit parts are coming from China,” says Calabria from PC
Components. “They may look great to the untrained eye, but a seasoned
inspector can see that this part was made in China and this part was
made in Mexico.”

The authorized or franchised distribution world
is not immune to the flow of counterfeit parts. Distributors and
suppliers have to be vigilant about returns, their point of
vulnerability to counterfeit parts. “One of our biggest concerns is EMS
companies who buy huge quantities from a variety of sources and
co-mingle the inventory,” says Gray from NEDA. “They could have bought
10,000 parts, 5,000 from authorized distributor A, 2,000 from authorized
distributor B, and 3,000 on the open market. So, when the parts are
returned, it could be open-market parts getting returned to an
authorized distributor.”

Avnet Inc is well aware of the vulnerability
and takes measures to ensure the returns they receive are actually
components they sold. “We have a strict return policy,” says Chuck
Delph, SVP of sales in the Americas for Avnet Electronics Marketing Americas. “We do visual inspection to make sure what we got back is something we shipped out.”

The defense and aerospace industries have put
enormous effort into identifying counterfeit parts. They have a lot at
stake, since bad parts could lead to missile failure or a plane dropping
out of the sky. “Defense and aerospace are keeping counterfeit parts
out by training people how to spot counterfeits,” says Tom Sharpe, VP at
SMT, an independent distributor in Sandy Hook, CT. “I think their
mitigation strategies are going to rapidly flow down to the commercial
industries, since counterfeiting is just as bad in commercial at it is
in defense.”

IDEA has aggressively developed identification
strategies to help its independent distributor members keep their
inventory free of counterfeit parts. “It isn’t realistic to buy only
from authorized sources, since it’s impossible to predict demand,” says
Kristal Snider, VP at ERAI Inc,
a company that analyzes rick in the electronics industry. “But some of
the independent distributors are investing tens of thousands of dollars
to take care of the risk of counterfeit parts.”

IDEA encourages companies in the commercial
sector to take a lesson from defense in keeping inventory clean.
“Independents buy from franchise distributors and franchise distributors
buy from independents, so no one should be ignoring this problem,” says
Eggeman from IDEA. “The military has really stepped up to develop
mitigation policies so they don’t get counterfeit parts buy accident.
Now we need to see the commercial side of the industry develop policies
in their own organizations.”

Ultimately, the best strategy for avoiding bad
parts is working with trading partners you can trust. “We work in a
trusted environment where we feel we can protect our customer,” says
Avnet’s Delph. “If you’re going to buy something outside a franchised
partner, do some due diligence on who you’re buying from.”

The Department of Commerce stresses that
companies need to create lists of trusted and “untrusted” organizations
in the components industry. While associations such as IDEA continue to
develop identification strategies, trust is the strongest currency to
ward against counterfeit parts. “As counterfeit and substandard parts
continue to enter the market at an accelerated rate, it is important to
buy from sources you can trust,” says Glenn Smith, president and CEO of Mouser Electronics Inc in Mansfield, Texas.